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Wednesday, 3 July 2013

CIMB says industry growth a third of potential: Islamic Finance

The $1.6 trillion global Islamic finance industry is growing at a third of its potential as efforts to introduce sukuk tax legislation in non-Muslim nations have stalled, according to CIMB Group Holdings Bhd.

Shariah-compliant assets account for less than 2% of conventional equivalents, providing ample room for growth, Badlisyah Abdul Ghani, chief executive officer at CIMB Islamic Bank Bhd., a unit of Malaysia’s second-biggest lender, said in an interview. Mohd Effendi Abdullah, the head of Islamic markets at AmInvestment Bank Bhd., said there’s a need for more education and innovative new products to achieve that objective.

Efforts in South Korea, Australia, France and the U.K. to approve regulation have come to a halt, while Thailand is reviving plans to tap the market for the first time after at least a two-year delay. Nigeria is the latest to grant equal tax treatment, paving the way for a debut sukuk. Opposition from political and religious groups has prevented some nations from embracing banking that complies with the Koran’s ban on interest, according to Mohd Effendi.

“If the rules and regulations to make Islamic finance as accessible as the conventional market are in place, there’s no reason why it cannot grow at least three to four times the pace of today,” Kuala Lumpur-based Badlisyah said June 28. “The Islamic finance industry needs the right platform to grow.”

New Entrants

Global issuance of bonds that pay returns on assets to comply with Islamic principles dropped 9.5% in 2013 to $19 billion after reaching a record $46.4 billion last year, according to data compiled by Bloomberg. In 2003, the total market was just $4.3 billion.

Some countries with Islamic regulations are still reluctant to sell Shariah-compliant securities because the conventional market is more developed and issuers are more comfortable with such bonds, AmInvestment’s Mohd Effendi said, citing Singapore as an example.

Swiber Holdings Ltd., an oil and gas company based in the city state, is looking to sell its first sukuk this year. Sabana Shari’ah Compliant Industrial Real Estate Investment Trust, the Monetary Authority of Singapore, and City Development Ltd. are the only other issuers in the republic so far.

‘Some Excitement’

“New countries which are keen to develop Islamic finance further should tap the sukuk market to spur growth and to create some excitement for investors,” Mohd Effendi said. “The Islamic finance industry can grow at a faster pace if there are more new players.”

The Shariah debt market is dominated by Malaysia, Indonesia and the six-member Gulf Cooperation Council, which includes Saudi Arabia and the United Arab Emirates. The International Islamic Liquidity Management Corp. was set up in 2010 by central banks from Asia and the Middle East to sell the industry’s first short-term securities acceptable to investors across different jurisdictions. The issuance has yet to get off the ground.

While CIMB and AmInvestment are of the view that the industry’s growth hasn’t realized its full potential, Malaysian Islamic finance consultancy Amanie Advisors Sdn. said asset expansion is healthy and interest will pick up.

‘Good Start’

Regulators in key Islamic finance centers will continue to work together after they set up IILM, Baiza Bain, Amanie’s Kuala Lumpur-based managing director, said in a June 28 interview. The International Islamic Financial Market based in Bahrain issued global standards in June to help develop money markets and broaden the range of liquidity management tools.

“There’s a lot of effort among the players, especially the regulators, around the world, to consolidate their efforts,” Baiza said. “The establishment of the IILM is a good start. That will help to coordinate the redistribution of liquidity all over the world.”

Islamic Bank of Thailand, a state-owned lender, plans to sell 5 billion baht ($161 million) of 10-year notes in the fourth quarter, Bangkok-based Chief Executive Officer Thanin Angsuwarangsi said in a June 11 interview. Tunisia will issue $700 million in an inaugural offering once it has identified assets to back the securities, Finance Minister Elyes Fakhfakh said in May. South Africa is also looking at a debut issuance.

Yields on global Islamic bonds are rising on prospects the Federal Reserve will withdraw stimulus that’s contributed to fund inflows to emerging markets such as Malaysia and Indonesia.

Average borrowing costs climbed 65 basis points, or 0.65 percentage point, to 4.02% last month, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. That’s up from a record low of 2.67% on Jan. 10. The difference between average yields and the London interbank offered rate widened 38 basis points to 217.

Tax Hindrance

Islamic bonds sold on the international market retreated 2.3% this year, HSBC data shows, while debt in emerging nations dropped 8.2%, according to JPMorgan Chase & Co.’s EMBI Global Index.

The yield on Malaysia’s 3.928%sovereign sukuk due June 2015 rose 23 basis points in June to 1.51% and was little changed yesterday, according to data compiled by Bloomberg. The premium investors demand to hold Dubai’s 6.396% November 2014 debt over the Southeast Asian nation’s bonds narrowed six basis points to 89 yesterday.

Ernst & Young said in a December report that demand for sukuk could reach $600 billion by 2015. Saudi Arabia had about $207 billion in Shariah-compliant financial assets last year, the world’s largest, according to the article.

“Regulatory wise, Islamic finance in the Middle East and Malaysia is doing okay,” Tengku Zafrul Tengku Abdul Aziz, CEO of Maybank Investment Bank Bhd., a unit of Malayan Banking in Kuala Lumpur, said in an interview yesterday. “Other countries are not seeing much growth mainly because of the tax laws.”

‘Underlying Cause’

Another factor that could have held back expansion in the industry is the fear of anything “Islamic,” Megat Hizaini Hassan, partner and head of the Islamic finance practice at Kuala Lumpur-based law firm Lee Hishammuddin Allen & Gledhill, said in an e-mail interview yesterday.

“Such rejection may perhaps be traced to a deeper underlying cause, that is, discomfort with the unfamiliar,” Megat Hizaini said. “This may be overcome if there is greater familiarity and awareness of the potential for Islamic finance to play a positive role as a viable alternative.”

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